Use your Accountant for Advice

Use your Accountant for Advice

We had an occasion where one of our clients came into the office quite distraught because he had just been given a new commercial lease agreement to sign by his landlord's new property manager. The contract effectively doubled his rent for the year. 

His question was could he afford to sign it, we sat down with him and looked at the agreement and looked at his profit, it was clear that he could not afford the increase in rent. Not only that but the agent had included the operating expenses on the property that now fell to our client so that was another $8000 in costs a year, he was reluctant to go and seek advice from a solicitor as in his mind they were very expensive. Trusting us and knowing that we wouldn’t charge him an arm and leg we were able to give him some advice for him to move forward.

The problem would have been easily solved, with a lot less stress and pressure if he had kept his commercial lease up to date but unfortunately he let it lapse some time ago and was left at the mercy of the landlord

A different way of thinking 

The old thinking in property investing for mum and dad was to upgrade your home and to sell your existing home to a company with LTC status repurpose their mortgage on the rental and buy a better existing home. Because there have been changes to the tax rules for property investors i.e. loss ringfencing, Brightline Test and interest non deductiblity this makes this method ineffective.

Consideration should be given to forming a Family Trust as this has the advantage of asset protection, especially when there are children involved.  The possibility of a wealth tax rearing its ugly head again, especially when recently the Labour government has tasked the IRD to use new powers granted in dubious fashion under urgency to begin a survey of 400 wealthy individuals whose assets are said to exceed $20 million dollars and to look at the relationship between the wealth they hold and the amount of tax they actually pay. This may be some easy money for IRD.

Commercial Property

There has been so much focus on the tax changes to property of late that it’s easy to forget that there are different types of property investment and they are most certainly no longer treated equally or fairly under the existing tax laws. 

There is now a stark contrast between “Residential land” which is essentially property with a dwelling on it, or capable of taking a dwelling, and commercial property. 

There are significant tax changes that differ between residential and commercial.

When you start considering commercial, most of us immediately think of a shop or an office but commercial property comes in many shapes and sizes. Something as simple as a carpark space is in fact a commercial property and commercial, in the tax sense, can also include storage units along with rural property like farms, vineyards and forestry blocks. 

So, what are the key tax differences between commercial and residential from a tax perspective now? 

1. Depreciation. From 1 April 2020, the ability to depreciate commercial buildings at 2% was reinstated as a Covid-19 relief measure. There is still no depreciation allowed on residential buildings. 
2. Depreciation of chattels and building fitout. Whilst there is a modest list of residential chattels that can be depreciated if they are not physically attached to the building, the list of items that can be depreciated within a commercial building is extensive. The ability to depreciate these at much higher rates than the building rate provides a generous deduction that is not impacting cash flow at all. 
3. No loss ringfencing.  A tax loss on a commercial property investment is not ringfenced though, meaning it can be offset against other income, offering an immediate and material tax saving, especially for those in the new 39% tax bracket. 
4. No Brightline. Brightline tax (capital gains in disguise) is a residential based tax and has no commercial implication at all.
5. Interest deductibility. Lending for commercial property where full deductibility of interest is available. Interestingly, it's also available if you use residential property you already own to secure a mortgage that is used to buy commercial property. It’s the use of the borrowed funds that matters, not the security. 
6. GST. Residential property investment remains an exempt activity for GST whereas commercial property is generally subject to GST. Being GST registered though for commercial investment has no bearing on existing residential property. Investors would be sensible to gain an understanding of the compulsory zero-rating rules that apply to property transactions but the need to be GST registered, in and of itself, should not be a barrier to entry into commercial property investment. 

For those that are new to commercial property investment and management that want to make an acquisition, consider using the services of a real estate agent specialising in commercial property. There are some good agents in the market with many years of experience that can be engaged to assist with making an acquisition and managing lease obligations, so again, a lack of knowledge of the market or the process doesn’t need to necessarily exclude a first-time investor from making a commercial property investment acquisition.

HAVE WE GOT YOU THINKING?

Give us a call on (04) 563 6965 or email: dennis@taxman.co.nz or shawn@taxman.co.nz

Keep an eye out for March’s article!